NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Non-Life Insurance Products
Mr. Rajesh Iyer insures his factory stock worth Rs 80 lakh for only Rs 50 lakh under a fire policy containing the average clause. A fire causes a genuine loss of Rs 16 lakh to the stock. Ignoring any deductible, how much will the insurer pay?
The insurer pays Rs 10 lakh. With the average clause, the claim is scaled by sum insured over actual value: 16 lakh x 50/80 = Rs 10 lakh. The insured bears the balance as a penalty for underinsurance of the stock.
- ARs 16 lakh
- BRs 10 lakhCorrect
- CRs 8 lakh
- DRs 12.8 lakh
Explanation
Under the average clause, claim = loss x (sum insured / value at risk) = 16 x 50/80 = Rs 10 lakh. Rs 16 lakh ignores the underinsurance. Rs 12.8 lakh would come from using 80% incorrectly (16 x 0.8), and Rs 8 lakh from halving the loss.
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